Summer’s Harvest

Wall Street traders make up for the lack of holidays in August by taking vacations, usually after the middle of the month. Trading volume dips, sometimes exaggerating market swings and clouding identification of sector trends. Despite this choppy behavior, August is actually the most stable month overall, having notched an average 0.08% gain over the last 40 years.

Investors seem far from showing the unbridled optimism that so often accompanies market tops. The second quarter earnings season is almost over with the majority of companies exceeding analyst estimates. Forecasts for the rest of the year were guarded; probably a good sign, as it’s easier to deliver positive surprises if you haven’t too eagerly anticipated them.

Historically, July has not been a very good month for stocks. Last year, sluggish performance paved the way for a 634-point drop in the Dow Jones average when Standard & Poor’s downgraded our federal debt rating. That took the Dow average down to 10,809. One year later, it made a new closing high of 15,658.

There is always an ample supply of worries around but those who have given in to them have and are missing a strong stock market. The 2008-2009 recession provoked the most painful market drop in modern times. The Dow fell more than 50% in 17 months. That was less than the 80% drop that announced the Depression, but that stretched out to three years.

These drops seem to have left scars in our memories. Those who lived through the Depression are understandably adverse to risk. They sometimes keep their extra money in non-interest paying bank accounts or chase illusory “safety” in things like gold. Even though stocks have climbed back from their lows of the recent recession, the panting cries for attention from the financial media are scaring many away from building their own capital investments.

There are no sure things in this business but there are good opportunities. Franklin Resources (BEN-$49), a substantial provider of more than 100 mutual and closed-end funds, dipped recently on concerns that its performance will suffer as rising interest rates impact its bond portfolios. Although known as a bond house, Franklin has over half its assets in stock or hybrid funds. Its bond funds are mostly made up of short-duration bonds with limited exposure to higher rates.

We hold two, Franklin Trust (FT-$7) and Franklin Limited Duration (FTF-$12.75). Their prices slipped with the overall bond market in an overreaction to future changes in Federal Reserve policy but they both yield over 6% from portfolios with bond durations of less than five years.

George Gershwin wrote in “Summertime” that “the livin’ is easy.” Successful investing in the stock market is never easy but this August finds stocks in growing companies still reasonably priced overall. As the song continues, “Fish are jumpin’ and the cotton is high.”